The Watchman Trust is a sham. Designed by a subsequently unlicensed CPA and formed by the attorney he recommended, the Trust, with its Sub S, partnerships and sub-trust, left the freight forwarding business in the hands of the previous owner-operator, who didn’t pay the freight. Instead, he claimed distributions to a non-exempt charitable trust that he never made.

IRS has an SOL problem, and concedes the fraud toll. But 6SOL rescues them, as the ultimate owners are over the 25% unreported income bar.

It’s true the SNODs aren’t models of clarity and precision, but they did tell all the parties enough to satisfy Section 7522.

“Section 7522(a) provides that a notice of deficiency ‘shall describe the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions to the tax, and assessable penalties included in such notice.’ It further provides that ‘[a]n inadequate description under the preceding sentence shall not invalidate such notice. Id. The … notice identifies the amounts of the tax deficiencies, the tax years at issue, and reasons for the adjustments. We hold that the notice satisfies the requirements of section 7522.” 2018 T. C. Memo. 66, at p. 24.

Besides, this is a trial de novo, past is prologue, and if IRS wild-cards new matter (different proof required), IRS has burden of proof.

Using the 5 Cir. tests (Watchman is TX based), Watchman is a sham. The same man who ran the freight forwarding business ran Watchman, the Sub S, the partnerships and the sub-trust, and the ostensible trust protector and “independent” trustee hadn’t the ability to run anything. And he alone could decide where the money went.

But the same man had been through a tough audit years before with no change, relied on professionals other than the unlicensed CPA and his attorney pal, and, although a successful businessman, wasn’t a tax guru. He told the pros everything, And IRS, having the burden of proof on the accuracy chops (because they hadn’t raised them in the SNOD, only Section 6663 fraud, which they dropped, and raised the Section 6662 chops only in their answer) couldn’t prove otherwise.

“We cannot say that the Ps failed to do what reasonable and prudent persons would do under similar circumstances. After his prior experience with a prolonged IRS audit that resulted in no adjustments, Mr. P wanted to make his business ‘audit-proof’, which to him meant that ‘nothing was hidden’ and there was no concealed income or excessive expense deductions. He wanted tax reporting where ‘everything is above board and laid on the table.’ We believe that Mr. P was sincere in his testimony except to the extent he denied knowledge with respect to Watchman. While Mr. P knew that he was not paying income tax on his business income, he believed that he was being honest in his income tax reporting as the untaxed money was being given to charity and reinvested in his business.” 2018 T. C. Memo. 66, at p. 46. (Names omitted).

The books showed the right numbers, only put them to the wrong places. IRS didn’t challenge the income, only the nonpayment of tax. No accuracy chops.

An author, teacher, advocate and trusted advisor, Lew Taishoff is a New York City-based attorney with 51 years of experience in corporate and individual tax and real estate matters. He is an Enrolled Agent, examined and admitted to practice before the Internal Revenue Service, and admitted to practice before the United States ... Continue reading →